The rules for retirement are changing. In reality, retirement as a life phase is a relatively new concept when looked at in the context of all of human history.
According to a recent Merrill Lynch publication, from 1900-1990 the average retirement age fell from 76 all the way down to 63 years of age. However, after a nine decade run, this trend is gradually reversing and for the most recent decade ending in 2010, this average crept back up to 64.
The biggest question for people in their 40s and 50s used to be: When can I retire? However, given people’s significantly expanding life spans, this question is now being rapidly replaced with: Will I outlive my money? If you’re asking this question, read on for five strategies to avoid outliving your money and for having the happy retirement you’ve always envisioned.
Strategy 1: Avoid Retiring Too Early
Gone are the days when you collect the gold watch at age 60 and only need to make your money stretch for 10-15 years. If you’re going to live to 90 or even 100, the single biggest thing you can do to shore up your retirement finances is continue working through your 60s. If you love your current job, keep at it. However, if not, consider pursuing an encore career with either more flexibility of schedule or more fulfilling work to keep building your retirement nest egg.
Strategy 2: Have a (Retirement) Plan
Make sure you have a plan in terms of how much you can realistically spend in retirement. As a rule of thumb, the 4% rule is a great place to start. Developed in the 1990s by William Bengen, this rule holds that retirees can safely withdraw about 4% of their retirement plan balance each year and never run out of money. (For more, see: Can I Retire Yet?)
But you’ll see that like most rules of thumb, this isn’t always the case, but it is a great starting point. If you work through the math and get a clear cut answer, congratulations. You can probably safely retire and enjoy a comfortable standard of living.
However, if instead your answer is borderline in terms of how much you can safely withdraw from your savings versus the standard of living you’d like to maintain, then consider reaching out to a financial advisor to put together a comprehensive retirement plan for you.
Strategy 3: Play to Win Instead of Playing Not to Lose
Avoid investing too conservatively too soon. Understandably, as you near retirement you may worry that you do not have time to recover from a major market correction and want to park all of your money in “safe” investments. Particularly in today’s ultra-low interest rate environment, this approach really isn’t safe at all because it simply won’t generate the returns needed to outpace inflation and fund the kind of retirement that you want to lead.
I’ve spoken with many clients nearing retirement on many occasions about this topic and also have done the math to prove the point. Consider a hypothetical 60%/40% stock/bond portfolio. With a review of historical data from 1928-2015, this simple portfolio never produced a negative return over a seven-year period and averaged 8.92% per year during that time.
Think about that – 1928 to 2015 included some pretty rough time periods including:
- The Great Depression
- World War II
- Stagflation of the 1970s
- The dotcom crash (2000-2002)
- The housing bubble collapse
And yet through all these crises, investors who patiently waited seven years and invested in a simple portfolio of stocks and bonds always made money. While we do know that past performance is never a guarantee of future returns, I’d rather have a chance at earning close to 9% a year to support my retirement plans than settle for 2% to 4% returns (after fees) on an annuity and risk having to reduce my standard of living later in retirement.
Strategy 4: Avoid Being in Too Big a Hurry to Be Debt Free
If you’re nearing the end of your working years and still have a mortgage payment, you may have the urge to pay off your mortgage and be debt free as you roll into your retirement years. This is good from a peace of mind standpoint; however, some people make the mistake of making a big withdrawal from a 401(k) or other retirement plan to get there.
Here are four reasons not to do this:
- Withdrawals from retirement plans are taxable income and can bump you into a higher tax bracket, which in turn triggers a bigger tax bill.
- You’ll lose any deductions you are getting on the interest you are paying on your mortgage.
- You might also trigger higher Part B and Part D Medicare premiums if you have a significant increase in your taxable income.
- Although far from a guarantee, remember from strategy three that historical returns on a simple investment portfolio average close to 9%. Leaving your money invested and growing is usually far better than the money you’ll save by paying down your mortgage.
Consider paying down your mortgage more slowly with smaller withdrawals to avoid these negative tax consequences and to capture any long-term investment growth that the market has to offer. (For more, see: When Do I Need a Financial Planner?)
Strategy 5: Take Control of Your Retirement Accounts
If you’re like most people, you’ve changed jobs at least once if not multiple times. Times of career change are often hectic and the last thing most people worry about is what to do with your 401(k) from your previous employer. As a result, people in their 40s and 50s often have one or several of these old 401(k)s laying around. (For more, see: The Advantages of Automating Your Financial Life.)
They are great in terms of the matching contribution offered by most corporate employers. However, 401(k)s are often not so great when you leave a company and the matching contribution goes away. They often have limited investment choices and higher fees than a traditional IRA that you manage on your own or with the help of an advisor. Take the time to roll these accounts over to your own IRA to give you more, typically lower-cost investment options to keep more money growing in your retirement account and less money going out the door in unnecessary fees.
If you have that nagging worry in the back of your mind and are asking – Will I outlive my money? – take stock of your current finances based on the five strategies listed above. Pick one as a focus for the next month or two and work your way through the list. You’ll be glad you did when it is finally time to retire and enjoy not only the fruits of your labor, but also the benefit of all the good spending and saving decisions you’ve made along the way. (For related reading, see: 6 Questions to Ask a Financial Advisor.)